- Forex Weekly Outlook February 20-24
The US dollar gained against its counterparts last week, after data showed producers price index rose 0.6 percent and inflation also surged 0.6 percent in January. Buttressing the general perception that increased in gasoline cost will pressure consumer prices above the Fed 2 percent inflation target and force the FOMC to adjust interest rates.
However, wage growth remained below projection, plunging to 2.5 percent from 2.8 percent recorded in December, which is capable of hurting consumer spending (0.4%) that has been supporting the economy if the Fed hike rate with declining wages. Therefore, it’s unlikely the fed will move this March as widely speculated, however, Trump new tax policy due to be announced this week can change this view.
On tax policy, the possibility of law makers cutting corporate tax to 20 percent from current 35 percent and the Fed’s hawkish outlook boosted the attractiveness of the US dollar last week. Although, retail business owners are worried that the proposed border tax on import goods will hurt revenues and subsequently affect wages, law makers insisted it will help generate about $1 trillion needed to reduce the deficit. Hence, it is hard to quantify or deduce the US dollar direction ahead of new tax policy.
In the UK, the consumer spending (0.3%) that has been supporting the economy dropped for a third consecutive month in January, signaling that post-Brexit resilience is gradually coming to an end as high consumer prices (food and fuel) seems to have started hurting purchasing power even before March – stipulated date for triggering Brexit.
Consequently, job creation is gradually slowing down, according to the statistics office report for the final quarter of 2016. Also, pay growth fell to 2.6 percent in the same quarter, while labour market is still strong, the pace has cooled in recent time over Brexit uncertainty. Therefore, this is expected to weigh on the British Pound and render it unattractive as investors continued to look elsewhere to avert lost.
In New Zealand, consumer spending remains steady in the last quarter of 2016. Rising 0.8 percent, but the New Zealand dollar declined against its counterparts after RBNZ governor said the continuous gain of the currency could impede growth. Prompting traders to sell-off the haven currency. Overall, the global financial market remains vague ahead of Europe uprising and uncertainty in the US.
This week, GBPUSD and NZDJPY top my list.
The series of events happening in the Euro-area continued to weigh on the pound outlook. However, Brexit and drop in consumer confidence standout. Whereas the US dollar remained strong and likely to continue so.
Technically, after the pair peaked at 1.2773 in December, its highest post-Brexit, it has lost about 363 pips and failed to top 1.2704 price levels attained this February. Again, the pair is trading below 20-days moving average on the daily candlestick and closed below weekly 20-days moving average, after the doji formed two weeks ago. Indicating the pressure is on the downside as the U.K. prepare to trigger article 50 next month.
This week, I am bearish on GBPUSD as long as 1.2500 holds and will be looking to sell below 1.2426 price levels for 1.2297 targets, a sustained break should open up 1.2148 in days to come. But a negative comment or perceived negative new policy from the U.S. can void this analysis as the world await Trump new tax policy.
Last week, I wrote extensively on the New Zealand dollar outlook. While the economy remains strong and well-supported by the surging commodity prices, traders seem to be selling the pair after Governor Graeme Wheeler statement on the danger of high foreign exchange to the economy.
The pair called the top at 83.79 price levels, its 8-month high, and dropped 280 pips to close at 81.07 price levels. One of the reasons this is a good sell is the renewed interest in the Japanese yen as investors scramble for safe-haven assets ahead of numerous changes that will be taking place across the Group 8 nations. Again, I don’t think the pair is attractive enough to top its 8-month high after RBNZ statement. Hence, I am bearish on this pair this week and will be looking to sell below 81.02 support for 78.83 targets, a sustained break should boost its attractiveness for 76.23 targets 2.
NZDUSD closed below the channel last week but failed to meet our target of 0.6989. However, I remain bearish on NZDUSD this week, one, for the reasons stated above, and two, the continuous gain of the US dollar should aid NZDUSD bearish move below 0.7124 support levels, that also serves as 20-days moving average.
Foreign-Currency Shortages to Render Nigerian Banks Vulnerable -Moody’s
Forex Scarcity Renders Nigerian Banks Vulnerable
Nigeria’s banks to experience acute funding challenges as the drop in foreign currency deposits hit a record-low following COVID-19 pandemic disruption, stated Moody’s.
In a recent report titled ‘Renewed foreign-currency shortages highlight vulnerability for Nigerian banks‘ published by Moody’s Investors Service, a bond credit rating business of Moody’s Corporation, the drop in dollar deposits amid low oil revenue, volatile foreign investment and declined remittances from abroad due to COVID-19 pandemic are threatening to renew forex liquidity crisis of 2016-2017 on Nigerian banks.
“Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016,” said Peter Mushangwe, Analyst at Moody’s.
“Our moderate scenario where foreign-currency deposits decline by 20%, while loans remain constant, would increase rated banks’ funding gap to NGN1.5 trillion [$3.8 billion], and to NGN1.9 trillion [$5.0 billion] under our severe-case scenario of 35% foreign-currency deposit contraction, creating acute funding challenges.”
According to Moody’s, oil and gas exports account for about 90 percent of Nigeria’s foreign currency revenue. However, with crude oil now trading at around $40 per barrel, far below its average of $65 per barrel in 2019 and $72 per barrel in 2018, Nigeria’s banks are expected to struggle to meet foreign-currency withdrawals in the next 12 to 18 months.
Moody’s said its rated “banks reduced their foreign currency funding gap to a combined NGN354 billion ($984 million) in 2019 from NGN1.436 trillion ($5.5 billion) in 2016. The ratio of foreign-currency loans to foreign-currency deposits at Moody’s rated banks dropped to 106% at the end of 2019 from 135% in 2016 as banks cut back on dollar loans while building up their dollar deposits.
“The smaller funding gap will enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs. However, in the event of foreign currency deposits contracting by 20% or more, banks’ funding gaps will be significant.”
This further explained why the Nigerian Naira is trading at a record low of N461 against the United States dollar on the black market in recent weeks.
Naira Records Marginal Gain Against the US Dollar on Thursday
Naira Gains Marginally Against the US Dollar On Thursday
The Nigerian Naira gained slightly against the United States dollar both on the black market and Investors and Exporters’ Forex Window on Thursday
On the black market, the local currency gained N1 from the N462 it exchanged against the US dollar on Wednesday to close at N461 on Thursday.
This slight improvement continues against the Euro single currency on Thursday as the Naira gained N2 from N505 it traded on Wednesday to N502 on Thursday.
However, the Nigerian Naira was unchanged against the British Pound. The local currency traded flat at N560 against the British Pound.
On the Investors and Exporters’ Forex Window, the Naira gained 0.13 percent or 50 kobo against the US dollar to trade at N386. This was after trading as low as N389.75 during the trading hours of Thursday.
Activity level rose by almost 2000 percent from $10.37 million turnover recorded on Wednesday to $204.90 million on Thursday.
The Nigerian Naira remained under pressure as dollar scarcity continues to hurt its value and sentiment.
Also, the lack of clear policy direction is one of the reasons Nigeria continues to struggle with needed capital importation and huge forex demand from investors looking to repatriate their funds.
The Federal Government recently raised fuel pumping price at a time when most nations are reducing costs to ease economic burden on their citizens.
This move already rejected by the Nigeria Labour Congress (NLC) on Thursday highlighted the nation’s lack of economic direction despite numerous announcements by the central bank and federal government to mitigate negative impacts of COVID-19 on the economy.
Naira Exchanges at Record-low Against US Dollar on Black Market
Naira Trades at Record-low of N462 Against US Dollar
The Nigerian Naira plunged to a record low of N462 against the United States dollar on Wednesday on the black market as scarcity persists.
The local currency lost N2 against the US dollar from the N460 it traded on Tuesday to N462 on the black market on Wednesday. While against the British Pound, the Naira remained unchanged at N560. The same rate it exchanged on Tuesday.
Similarly, the Nigerian Naira remained flat at N505 against the Euro single currency on the black market.
On the Investors and Exporters Forex Window, the local currency remained unchanged at N386.50 to a US dollar, the same rate it was exchanged on Tuesday.
Activity on the platform dropped on Wednesday as daily turnover stood at $10.37 million, below the $14.37 that was exchanged on Tuesday.
Scarcity across key foreign exchange segments continues to hurt the nation’s currency and economic outlook due to the inability of investors and businesses to access foreign exchange needed to import raw materials into Africa’s largest economy.
This was evident in the broad-based decline recorded in the manufacturing sector in the month of June.
Also, the unconfirmed report that the Federal Government is looking to converge the nation’s exchange rate due to the pressure from the International Monetary Fund (IMF) added to Naira pressure as speculators and hoarders now have reason to remain in business.
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